We are on the cusp of a massive upheaval in financial services and, no, it is not because firms have to comply with the new DOL rule. Let’s look at what’s going on today:
80% of the daily market trading is electronic, and all the traders are buying the same things. Amazon accounts for 1% of the S&P 500; Facebook accounts for 1.5%. For you mathematicians, 1/250th of the index stocks account for 2.5% of the value. And where do you think they are going? Up, down or sideways? Of course, yes.
Investors are obsessed with performance, and our industry is responsible for that obsession. We’ve done a terrible job of educating investors, because we’ve done a terrible job of educating advisors. I challenge advisors and investors to refute this with facts: “Past performance is an unreliable predictor of future performance.”
ETFs are today’s darlings. There are more ETF shares outstanding that originally issued, and they can change their market valuations. Depending on the issuer, ETFs are not created equal. Fees are dramatically different. And, an index-type fund (say an S&P 500) doesn’t hold the 500 stocks in the index, just a “representative” sample they think replicates the index. They are not riskless. Let’s not even talk about the idea of actively managed ETFs or, even worse, options on ETFs. They can implode. Implode!
Our market today requires stock pickers, and where are they? Few and far between. I only know 3 that are outstanding. Hedge funds have cut their own throats. Their process formula followers can’t be stock pickers. Hedge Funds died in 2008; we just haven’t cremated them yet.
Advisory firms and Broker-dealers are knee jerk panicking at complying with that DOL fiduciary rule. The ridiculous thing there is that it is NOT a big deal. Complying is easy and I’ll put out a 4 page guide in detail-—all they need to know— next week. So, the firms are scared of ghosts and shadows. Independent advisors are confused. I think in 10 years we’ll have half of the Advisors we do now. Maybe that’s not a bad thing.
The markets are at historical highs, according to PE ratios and earnings analysis; yet the smartest momentum and economic analyst I’ve know in 43 years in this industry (no, he does’t sell his research or work for a firm) agrees and says he thinks the market is going up. At the same time he says that the time to look for a bear market is next year after the Fed’s second rate hike. One of the best money managers I ever met who analyzes free cash flow says there’s great buying opportunities out there, but he thinks the market is going down. Buyers and sellers. For every buyer of a security there is a seller. That’s why prices fluctuate. It’s basic supply and demand. Would you want to be a market maker today?
And, DIY investors and Rep as PM Advisors think they can beat a market which is not efficient? Over time? Investors are not rational, and Markowitz is archaic. Go figure.
Personally, I’m glad I have somebody handling my investments. They provide consistency in the chaos.
Any comments?